Michigan

Michigan facing budget problems, weaker economy

Michigan faces a budget deficit of at least $300 million next year and its economy will be weaker than expected, more bad news in a state that had to raise taxes last year to balance the books.

Lawmakers were briefed on the bleak financial picture Wednesday. Reasons for the projected budget shortfall include a sluggish economy, struggling housing market, the federal economic stimulus plan and newly enacted state tax subsidies luring Hollywood to make movies in Michigan, said Gary Olson, director of the nonpartisan Senate Fiscal Agency.

"There's really not much good news in the forecast," Olson told members of the Senate Appropriations Committee.

Compared with forecasts made in January, the U.S. and Michigan economies will be weaker than expected both this year and next. Inflation is expected to be higher, income growth slower and employment lower than anticipated. State tax revenues will fall $550 million short of projections for the budget that starts Oct. 1.

One bright spot is that it appears there is enough money so legislators and Gov. Jennifer Granholm can avoid having to make mid-year spending cuts to K-12 public schools and other government services in the existing budget running through Sept. 30.

"We're actually in decent shape considering where we've been in the last few years," said Sen. Michael Switalski of Roseville, the top-ranking Democrat on the Appropriations Committee.

The House and Senate fiscal agencies and Gov. Jennifer Granholm's administration will meet Friday to revise how much revenue state government can expect to collect this budget year and next.

The House Fiscal Agency was more optimistic than the Senate in its forecast released earlier in the week, estimating the state treasury next year will take in $424 million less than expected.

Olson on Wednesday estimated a potential $300 million deficit in the next budget. That is assuming there is some leftover money from the current budget, state revenue-sharing aid is not increased for local governments, tobacco settlement payments to the state are withheld pending a dispute and the Legislature spends less than what Granholm proposed in her budget, he said.

Even then, Olson said, spending cuts are looming for the 2008-09 budget. Granholm already has ruled out higher taxes.

The Senate has approved giving K-12 schools an increase of $71 to $142 per student, depending on the school district, and using about another $19 to $20 per student to spend on buildings. Unless legislators find a way to offset a shortfall in the School Aid Fund, they may have to give schools less of an increase -- ranging from a $28 to $56 per pupil or $40 to $80 per pupil, Olson said.

While some of Michigan's budget struggles can be blamed on the economy, some also stem from policy decisions.

Federal rebate checks sent to taxpayers to boost the economy will increase casino taxes, lottery revenue and sales tax revenue. But because the new Michigan Business Tax is linked to federal taxable income and businesses will claim an acceleration in depreciation under the stimulus plan, the budget will see a net loss of $127 million over two budget years.

A new refundable tax credit aimed at boosting the film industry will cost the state another $110 million next budget year.

Olson said the incentives will be "wildly successful" but added there is "no way" any increased economic activity from making movies and TV shows will offset the checks cut to studios for their production costs.

The housing market is hurting property values, which affects how much goes to schools through the state education property tax. The state also is getting hurt because fewer homes are being bought and sold, translating into less in real estate transfer taxes. Revenue from the transfer tax next year could be down 52 percent from its peak in the 2003-04 fiscal year.